The Fed should have been in front of this. Instead, they are far behind and must now catch up quickly.
The US Bureau of Labor Statistics just released the Consumer Price Index (CPI) increase for the month of December. The 0.5% increase means that for the entire year 2021, inflation was 7%, a 40-year high.
This poor result is primarily due to the shockingly irresponsible policy of the Federal Reserve.
For the past 40 years, the Fed has mostly kept the inflation rate at 3% or less. For the past decade, annual inflation has averaged just over 2%. Whenever there was even a hint of inflation, the Fed always stayed ahead of the curve.
For instance, at the end of 2016, there was a slight hint of inflation. The Fed raised interest rates eight times during the next two years. Fed officials said that their action took enough excess demand out of the economy to keep inflation low, but not too much demand to slow economic growth.
The U.S. Federal Reserve should have started a similar interest rate raising policy back in March or April. At that time, it was clear that the economy was growing and that excess demand was causing an increase in the inflation rate.
For most of the last decade, the CPI increased by 0.1% or 0.2% monthly. That meant the annual inflation rate was in the 2% range. Starting in January 2021, the CPI clearly pointed to increased inflationary pressure.
In January, the CPI increased 0.3%. In February it increased 0.4%. In March it increased 0.6%. And in April the CPI increased by 0.8%. Those data points alone should have been evident to the Fed that inflation was increasing and that unless Fed policy changed, 2021 would show the worst inflation in decades.
Instead, the Fed continued to purchase $120 billion monthly of government securities. It made these purchases by electronically printing money. That has increased the money supply — which has grown by about 20% in the last year.
Led to Inflated Excess Demand
The Fed also decided to keep interest rates near zero. This lack of action led to huge increases in excess demand, which is the primary reason for the high inflation we are experiencing…